Private Equity or Capital Investment consists of taking a financial stake in an unlisted company. This investment can take place at all stages of a company’s maturity: during its creation (venture capital), during its expansion (development capital), during its transmission (transmission capital) or when it encounters difficulties (recovery capital). It can be done directly or through a fund by delegating the selection and support to a team of professionals.
The returns delivered by the latter are particularly attractive since considering periods of 10, 20 or 30 years, they exceed 10% per year and are significantly higher than other asset classes. This return is obtained in return for a certain illiquidity of between 6 and 10 years (the time for an investment professional to help the company develop and create value) as well as risk taking on the invested capital.
Individuals more inclined to invest in Private Equity
The PACTE law (May 2019) marked a real turning point in France by allowing individuals to invest part of their savings in unlisted funds. Traditionally, they were reserved for institutional investors. The objective of the State is twofold: on the financial level, this law makes it easier to direct savings towards the real economy and the financing of companies; at the societal level, it promotes access for private investors to the most profitable investments.
For their part, insurers and management houses are also participating in this democratization. Insurers reference unit-linked investment capital funds. Since the PACTE law, private investors can allocate up to 50% of their life insurance contract in private equity. Finally, large houses are also opening up their funds so that individuals can invest alongside institutional investors with a lower threshold. This is the case of Edmond de Rothschild, for example, which launched the marketing of the ERES strategy (Edmond de Rothschild Equity Strategy), when the fourth vintage was raised. “ERES invests in European and American small and mid-cap companies, for better diversification, and aims for a rate of return in line with the expectations of private investors”, explains Mylène Bonot, Director of Investor Relations at Edmond de Rothschild, with whom we communicate regularly.
Private investors, attracted by the outlook for returns, are responding: in the first half of 2021, private investors (individuals and family offices) represented 17% of the capital raised, i.e. 1.7 billion euros (a 57% increase compared to the first semester 2020!).
A few precautions to consider
However, caution should be exercised in the choice of partner and investment vehicle. Beyond a promising historical return, other criteria such as the stability of the management team, the resilience of the portfolios, the consideration of environmental, social and governance issues which further accelerate performance are likely to to make the results replicable. Finally, it is preferable to invest in a fund also selected by institutional investors capable of analyzing a strategy in depth. It is therefore of primary importance to enlist the services of a wise advisor such as a CGPI in order to validate the strategy and the format of the vehicle before investing.
Article written in collaboration with Laura Carrey, Junior Wealth Management Advisor.